The easiest way to describe debt consolidation is simply combining lots of debts into one debt – usually through a loan.
Some people will try to consolidate credit cards with another credit card. This approach usually just moves high interest debt around and puts you in a deeper debt hole making it even harder to get out of debt in the long run.
The purpose of consolidation is to get a lower interest rate so you can pay off your debts faster and for less money. Most people start looking for debt consolidation loans when they find themselves only being able to make minimum payments on their cards. This is what’s usually referred to as the minimum payment debt trap.
Credit card minimum payments usually consist of mostly interest. Meaning your money really isn’t paying off much of the principal balance, it mostly goes towards interest. This means it could take years or even decades to get out of debt making interest-only payments.
For debt consolidation to be effective as a debt relief strategy, you should close or stop using all credit cards while paying off your loan. Continuing to use credit cards after getting a loan will only worsen your debt situation.
By stopping using credit cards and cutting living costs to put more money towards paying off the loan is the best path forward to finally living debt free.
Continue reading to learn what is a guarantor and check our article on the DSCR formula as well as the formula for debt to equity ratio.